Build Your Own Valley: Engineering Startup & Investor Ecosystems in Emerging Markets Around the World (Singapore, April 2016)

@DaveMcClure
@500Startups http://500.co
Singapore - April 2016
Build Your Own Valley
Engineering Startup + Investor Ecosystems
In Emerging Markets Around the World

• What is 500?
– $250M silicon valley VC fund + startup accelerator
– 125 people / 30 partners / 25 languages / 20 countries
– 1500+ Companies / 3000+ Founders / 200+ Mentors
– Investment, Accelerator, Distro, Marketing, Events, Education
– Community + Content + Conferences
• 1500+ Co’s / 50+ Countries
– Credit Karma ($3.5B)
– Twilio ($1B+)
– Grab ($1B+)
– Wildfire (acq GOOG, $350M)
– MakerBot (acq SSYS, $400M)
– Viki (acq Rakuten, $200M)
– Behance (acq Adobe, $150M)
– Simple (acq BBVA, $117M)
– Sunrise (acq MSFT, $100M)
– Udemy
– Ipsy
– TalkDesk
– Intercom
500 Startups 
Global Seed Fund & Startup Accelerator

Dave McClure 
Founding Partner, 500 Startups
00’s & 10’s:
• VC: Founders Fund, Facebook fbFund, 500 Startups
• Angel: Mashery, Mint.com, SlideShare, Twilio, Wildfire, SendGrid
• Marketing: PayPal, Simply Hired, Mint.com, O’Reilly
80’s & 90’s:
• Entrepreneur: Aslan Computing (acq’d by Servinet/Panurgy)
• Developer: Windows / SQL DB consultant (Intel, MSFT)
• Engineer: Johns Hopkins‘88, BS Eng / Applied Math

[ This Talk ]
• What is 500 Startups?
• Changes in Building Tech Startups
• Changes in Venture Capital Investing
• The “Lean” Investor + Portfolio Approach
• Engineering Investor Ecosystems in Emerging Markets
• Q&A

Re-engineering a
50 year old sport:
Venture Capital 2.0

Football
West Coast
Offense
Baseball
MoneyBall
Basketball
3 point
revolution
Venture Capital
500 Startups
“Lots of little bets”
500 Strategy: MoneyBall for Startups
Re-inventing a 50-year old sport

How DMC Became a VC
• Option 1: Go to Harvard/Stanford MBA, Become Associate,
Work at McKinsey / Google / Facebook, Re-Join VC as Partner,
Kick Back & Play Golf
• Option 2: Start Unicorn, Grow Big, Sell for $1B+, Join VC
• Option 3: Wander around Silicon Valley for 25 years as geek,
entrepreneur, marketer, angel, then start your own VC ﬁrm

500 Startups Mission
1. Find Smart People.
2. Give Them Money.
3. Wait for Good Sh*t to Happen.

Investor Ecosystem
Angels &
Incubators
($0-10M)
“Micro-VC” Funds
($10-100M)
“Big” VC Funds
($100-500M)
“Mega” VC Funds
(>$500M)
Incubation
0-$100K
Seed
$100K-$2M
Series A/B
$2-10M
Series B/C
$10-50M
Bootstrap, KickStarter,
AngelList, Crowdfunding
stage where
500 writes
first checks
stage where 500
doubles-down
(maybe)

500 Startups Mission
• Provide capital, community, education
to smart people (founders, investors)
• Build functional startup ecosystems
(founders, team, angels, accelerators, VC
funds, capital, exits, liquidity, etc)
• #HFGSD: Have Fun, Get Sh*t Done.

500 Startups: a Platform made of People
#500STRONG #500LOVE #HFGSD

Year People Locations AUM $ Companies
2010 5 MV 10 75
2011 10 BRZ 30 250
2012 15 MX, IND 50 450
2013 30 CHN, SEA 75 650
2014 50 SF, MENA 125 900
2015 100 Korea, UK, Thailand,
Vietnam, Germany, EU,
Israel, Japan, Turkey
200 1400
2016 150+ +10-20 More ??? 2000+
500 Startups History:
What a Long Strange Trip It’s Been

125 People, 20 Countries, 25 Languages

Changes in Tech Startups
• LESS Capital required to build product, get to market
– Dramatically reduced cost for servers, software, bandwidth
– Funding Platforms: KickStarter, Angel List, Funders Club, etc
– Access to online platforms for 100M-1B+ consumers, smallbiz, etc
• MORE Customers via ONLINE platforms (100M+ users)
– Search (Google, Baidu)
– Social (Facebook, Twitter, LinkedIn)
– Mobile (Apple, Android)
– E-Commerce (Amazon, PayPal, Alibaba)
– Media (YouTube, Pinterest, Instagram)
– Comm/Msgs (WeChat, WhatsApp, SnapChat, Email, Voice, SMS, etc)
• LOTS of little bets: Accelerators, Angels, Angel List, Small Exits
– Capital + Co-working + Mentoring -> Design, Data, Distribution
– “Fast, Cheap Fail”, network effects, quantitative + iterative investments

Before & After 2 Dot-Com Crashes 
LEAN Startup: Simpler, Faster, Cheaper, Smarter
Before 2000
”Big, Fat, Dinosaur Startup”
• Sun Servers
• Oracle DB
• Exodus Hosting
• 12-24mo dev cycle
• 6-18mo sales cycle
• <100M people online
• $1-2M seed round
• $3-5M Series A
• Sand Hill Road crawl
After 2008
”Lean, Little, Cockroach Startup”
• AWS, Google, PayPal, FB, TW
• Cloud + Open Source SW
• Lean Startup / Startup Wknd
• 3-90d dev cycle
• SaaS / online sales
• >3B people online
• <$100K incub + <$1M seed
• $1-3M Series A
• Angel List global visibility

Platforms 2.0 
Search, Social, Mobile,
Video, Messaging

Startup Risk Reduction
Concept
Early
Customer
Usage
Scalable
Customer
Acquisition
[about to be]
Profitable
Unit
Economics
Scalable
Profitable
Business
Functional
Prototype
PRODUCT
MARKET
REVENUE
Exit?
When 500
Likes to
Invest

Startup Education
• Business Plans / Revenue Projections
• Software + Design/UX
• Lean Startups + Continuous Deploy (Iterate)
• Metrics Framework + Continuous Testing
• Functional Prototypes / Customer Development
• Scalable [Internet] Marketing & Sales
• Cash-Flow Positive Unit Economics
• Pitching + Fundraising (hint: use AngelList.com)
• Monetization + Payments
• Customer Service + Support
20

Industry Changes
• Financial Market Crises (2000, 2008)
• Startup Efficiency, Lean Startup Movement, Reduced Capital Costs
• Growing Market, Global Distribution Platforms, “Growth Hacking”
• Improved Monetization, Payments Infrastructure
• Developing Startup Ecosystems, Global M&A
• Micro VC: Seed Funds (ex: First Round Capital)
• Incubators & Accelerators (ex: Y Combinator, 500 Startups)
• Funding Platforms (ex: Angel List, Kickstarter)
• Global Market of Angel Investors, Accelerators, Seed Funds
more info: http://PreMoney.co

Investor Education
• Startups are NOT Real Estate
• Most Startups Fail / Power Law Returns
• Portfolio Approach (20-100+ investments)
• Legal Structure, Financial Structure
• Syndication + Co-Investment
• Access to Downstream Capital
• Exits & Liquidity
23

http://bit.ly/99VCProblems

Portfolio Diversification
“Spray, not Pray”

Build Your Own Valley: Engineering Startup & Investor Ecosystems in Emerging Markets Around the World (Singapore, April 2016)

Q: Chances of spotting
unicorn?/
a) 1%
b) 2%
c) 5%
d) 10%
e) ZERO

Chances of spotting
unicorn = ~1%/

If portfolio size = 15
companies/

/
companies

500 Strategy: Lots of Little Bets*
1) make lots of little
bets on pre-traction,
early-stage startups
3) wait 5-10 years for returns:
-10-20% small exits @1-5X ($5-25M+)
-5-10% larger exits @5-20X ($25-250M+)
-1-2% unicorns @20-50X+ ($250M-1B+)
*See Peter Sims book: “Little Bets”
2) over the next five years,
double-down on top 20-30%
~500 co’s @ $100K 1st checks
100-200 co’s @ $200-500K
2nd/3rd checks
(target 25-50 exits @ $100M+)
(assume high failure rate ~50-80%)

Startup Investment Stages
• Concept
• Product
• Functional Prototype
• Early Users/Customers
• Other Investors
• Profitable Unit Economics?
• Scalable Cust Acquisition?
• Profitable Business
• Scalable Organization
• Exit / Liquidity?
34

Legal review Partner approval
Angel Pre-Seed Seed Post-Seed Series A/B Growth
Accelerator
Seed
“Distro"
Follow-On
Selection Criteria – Data-Driven Process Based on Pre-defined Metrics
• Product or service solves a problem for a specific target customer
• Capital-efficient business; operational at less than $1M in external financing
• Scalable internet-based distribution (search, social, mobile) or proven ability to scale sales
• Functional prototype required before investing (or previous product success)
• Measurable traction: engaged users, some revenue, and attractive unit economics
• Cross-functional team with design, engineering and marketing expertise
How 500 Invests:
Accelerator, Seed, Distro

The Lean Investor
Make lots of little bets:
• Start with many small “experiments”
• Filter out failures + small wins
• Double-down on stuff that looks like it’s working
• Incubation: $0-100K (“Build & Validate Product”)
• Seed: $100K-$1M (“Test & Grow Marketing Channels””)
• Venture: $1M-$10M (“Maximize Growth & Revenue”)

Investment Stage #1:  
Product Validation + Customer Usage
• Structure
– 1-3 founders
– $0-$100K investment
– Incubator environment: multiple peers, mentors/advisors
• Test Functional Prototype / “Minimum Viable Product” (MVP):
– Prototype->Alpha, ~3-6 months
– Develop Minimal Critical Feature Set => Get to “It Works! Someone Uses It.”
– Improve Design & Usability, Setup Conversion Metrics
– Test Small-Scale Customer Adoption (10-1000 users)
• Demonstrate Concept, Reduce Product Risk, Test Functional Use
• Develop Metrics & Filter for Possible Future Investment

Market Validation + Revenue Testing
• Structure
– 2-10 person team
– $100K-$1M investment
– Syndicate of Angel Investors / Small VC Funds
• Improve Product, Expand Customers, Test Revenue:
– Alpha->Beta, ~6-12 months
– Scale Customer Adoption => “Many People Use It, & They Pay.”
– Test Marketing Campaigns, Customer Acquisition Channels + Cost
– Test Revenue Generation, Find Profitable Customer Segments
• Prove Solution/Benefit, Assess Market Size
• Test Channel Cost, Revenue Opportunity
• Determine Org Structure, Key Hires

Revenue Validation + Growth
• Structure
– 5-25 person team
– $1M-$10M investment
– Seed & Venture Investors
• Make Money (or Go Big), Get to Sustainability:
– Beta->Production, 12-24 months
– Revenue / Growth => “We Can Make (a lot of) Money!”
– Mktg Plan => Predictable Channels / Campaigns + Budget
– Scalability & Infrastructure, Customer Service & Operations
– Connect with Distribution Partners, Expand Growth
• Prove/Expand Market, Operationalize Business
• Future Milestones: Profitable/Sustainable, Exit Options

Investment Allocation Strategy
• How long will companies take to exit / reach liquidity? (3-7 yrs)
• How long is your investment cycle? (ex: 3-5 yrs)
• When will capital be returned? (1X in 5-8 yrs, 2-5X in 8-12 yrs)
• Simple allocation for $10M investment budget over first 5 years
• 50% 1st checks + 50% 2nd/3rd checks
• ~100 1st checks @ $50K each ($5M), ~20 checks / yr
• ~10-20 2nd checks @ $250-500K each ($5M), ~3 checks / yr
1 2 3 54 7 8 109 11 12 13 15146
1 5432
50
15
.. .. ..

Critical Ecosystem Factors
• Optimism & Belief (“Silicon Valley”)
• Mentorship + Education (Knowledge)
• Universities + Companies (People)
• Capital, Legal, Finance (Infrastructure)
• Engineering + Design / UX (Product)
• Platforms + Distribution (Customers)
• Online Payments (Monetization)
• IPO / M&A Market (Exits)
45

We live in a World of ABUNDANCE
• There are LOTS of talented people in the world
• There are LOTS of entrepreneurs everywhere
• There is a LOT of capital sitting around, BUT….
• Not much is available for un-tested entrepreneurs :(
• 500 Startups plans to change that.

Who/What is an Entrepreneur?
• someone who WANTS to start a business
• someone who can RUN a business
• someone who can run a SUSTAINABLE business
• someone who can run a PROFITABLE business
that creates VALUE & employs LARGE # people
• someone who can run a $10M/yr business that
employs 100+people

How Big Is The Market?
Q: How Many Entrepreneurs?
• How Many People = 7,000,000,000 on earth
• 1% of Humanity is Entrepreneurial = 70,000,000 founders
• Live 70 years, try at least once = 1,000,000 founders / year
• How Much Do They Need? Zero? $100K? $1M? $10M?
• How Big is the Market = 1M founders x $10M = $10 TRILLION / year
• Come on, REALLY? (ok Divide by 100)
• 100,000 founders / year * $1M each = $100 BILLION / year

How Many VCs?
• How Many Founders? 1,000,000 founders / year
• (ok, divide by 100, let’s say 10,000 founders / year)
• 1 VC can make 20 investments / year
• 10,000 founders / 20 deals per VC = 500 VCs

Challenges for VCs & Angels
in Emerging Markets
• Smaller Markets than USA, UK/EU, CH/JPN
• Limited Internet / Mobile / Smartphone
• Tough Online Payments / Physical Logistics
• Small # of Early-Stage Capital / Firms
• Long Time to Exits /Liquidity (7-10 years)
• Small # IPOs (0?) / Small # Local Acquirers
51

Solutions for VCs & Angels
in Emerging Markets
• Increase #, frequency of early-stage investors
• Increase portfolio size, Decrease check size
• Increase #, frequency of acquirers
• Fund of Funds for Countries / Regions
• Liquidity Funds for Repurchase of Series A/B
• Use of Real Estate as Hedge / Synthetic Liquidity
• Tax Incentives for Global, Local Acquirers
• Tax Incentives for Investing in Startups, Innovation
52

Investing Resources
• The Venture Capital Cycle (Gompers, Lerner)
• Venture Deals (Feld, Mendelson)
• Angel Investing (Rose)
• Venture Hacks (Naval, Nivi)
• blogs: Fred Wilson, Brad Feld, Mark Suster
• Quora: Jason Lemkin, David Rose, etc
53

Questions? Comments?
• More Info?
– http://500.co (our company)
– http://500hats.com (my blog)
– https://angel.co/500startups (our fund)
– Dave McClure, @DaveMcClure

Build Your Own Valley: Engineering Startup & Investor Ecosystems in Emerging Markets Around the World (Singapore, April 2016)

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